The impact of the exchange rate regime on the dispersion of the price-change distribution: Evidence from a large panel of countries

This paper studies the impact of the exchange rate regime (ERR) on the dispersion of the cross-section distribution of price changes in a large panel of advanced and developing economies. We show that the ERR has an economically and statistically significant nonlinear impact on the dispersion of the price-change distribution. While intermediate regimes are associated with higher dispersion, floating exchange rates deliver lower dispersion. Fixed ERRs are also associated with lower dispersion; however, the impact is only marginally significant. This finding holds after controlling for different types of economic shocks, the characteristics of the monetary policy regime, as well as structural and institutional variables which impact cross-country variation in the price-change distribution. With few exceptions, the results are robust to controlling for mean inflation, alternative ERR classifications, different country groups, and the use of instruments to address the potential endogeneity of the choice of ERR.

Automated summary

This research shows that the exchange rate regime has a significant impact on the dispersion of price changes, with floating exchange rates typically resulting in lower price-change dispersion.